Where Did Your Money Go?
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Are you concerned about the rising cost of goods and products for your practice?
Are you concerned about passing cost increases to your clients and how they will react?
Are you concerned about pharmacy revenue being lost to online pharmacies?
Does the following scenario sound familiar? Dr. Smith reaches for her go-to NSAID on the shelf of the pharmacy and finds the space empty. She does a quick look toward the back door of the clinic and sees the UPS driver left a few boxes against the wall. She asks her technician to check the boxes for the missing NSAID. Sure enough, it’s there, and she quickly begins to dispense the correct number of pills. While entering the transaction in her inventory software, Dr. Smith happens to check her packing list against the cost of the drug shown in the system. To her disappointment, she sees the price of the drug increased by 5% over the past month, and no one made a change to the client charge in the billing system. So, in effect, she has been losing a 5% margin for a month. The client is waiting in the examination room and the next appointment is already running 15 minutes behind. She quickly applies the customary 2× prescription drug markup, prints the label, slaps it on the dispensing bottle, and moves on with her day.
It has been my observation from working closely with veterinarians and veterinary clinics that veterinarians and office managers have doubled (2×) the cost of drugs and goods as a rule for decades now. Do you do the same in your practice? Some exceptions to the 2× markup rule I have observed are drugs and goods that are heavily shopped, like flea and heartworm products and more “expensive” drugs—in these cases, the markup usually drops to 1.5×. Again, does this sound familiar? Have you ever stopped and asked if this is really a good pricing strategy, and can we do better? Moving away from thinking in terms of “markup” and instead focusing on “margin dollars” or “profit” when setting pricing could be beneficial. The desired gross margin should drive your markup, not the other way around.
Focusing on margin versus traditionally employed markups with your pharmacy inventory may increase your clinic’s revenue and profit margins.
Markup is the ratio between the cost of a good or service and its selling price (client charge). Markup is expressed as a percentage over the cost:
(Selling price of drug X to client – DVM’s cost of drug X) ÷ DVM’s cost of drug X
Gross margin is the difference between the selling price and the cost of goods sold, divided by the selling price, expressed as a percentage. Gross profit is the difference between revenue and the cost of goods sold, expressed in dollars.
(Selling price of drug X to client – DVM’s cost of drug X) ÷ Selling price of drug X to client
Note: Selling price = client charge = revenue
The following sample calculation of markup and gross margin for an FDA-approved generic drug can help explain the difference:
DVM’s drug cost for a 32-mL bottle of Loxicom® (meloxicam oral suspension) 1.5 mg/mL = $25 (rounded to nearest $)
DVM’s drug charge to the client using 2× pricing = $50
Markup = ($50 - $25) ÷ $25 = 1.00 or 100%
Margin = ($50 - $25) ÷ $50 = 0.50 or 50%
To illustrate the contrast in markup versus margin pricing structures further and to see how using FDA-approved generics can help increase your revenue, see the 2 scenarios below. FDA-approved generics have proven to be “bioequivalent” to the pioneer reference drug. This means the generic should perform equally as well as the pioneer in the pet.
Scenario 1: Drug Pricing Using Traditional 2× Cost to Owners
Pioneer Brand Meloxicam Oral Suspension 32 mL
Loxicom® Oral Suspension 32 mL
List cost to DVM for 1 bottle
Cost to client at 2× markup
Margin to clinic with 2× markup
Savings to client as compared with pioneer brand
Scenario 2: Pricing with a Margin-Focused Structure Using a Generic Drug
Loxicom® Oral Suspension 32 mL
List cost to DVM for 1 bottle
Cost of generic to client at $48 margin
Additional margin per bottle to the clinic using a generic drug with margin pricing as compared with pioneer brand using traditional pricing
Savings to client per bottle as compared with the pioneer brand using traditional pricing
In Scenario 1, which utilizes the 2× markup on both brands, prescribing the generic Loxicom® could offer a cost-saving alternative to the brand equivalent; however, you would lose $14 ($39 - $25 = $14) for every generic bottle sold as compared with the pioneer brand example.
In Scenario 2, we see benefits for both the clinic and the client. With the 2× markup, this clinic was making $39 in margin dollars per 32 mL sold. Let’s assume the clinic calculated a $48 margin would help them cover their overhead expenses and provide more profit to the clinic. Applying the $48 to the cost of the Loxicom® Oral Suspension 32 mL ($48 + $25 = $73) now puts the client charge at $73. In this example, $73 would save your client $5 compared with the pioneer brand at 2× markup and net the clinic ($48 - $39 = $9) more margin per 32-mL bottle sold.
A 32-mL bottle should treat an average-sized (35-45 lb) dog for 24 to 30 days. In this example, by switching to this margin pricing of $73 per 32-mL bottle, the clinic can realize this additional $9 in profit for every dog on generic meloxicam oral suspension in the practice, which can add up over a year’s time.
Those profit dollars can start to add up quickly! Imagine doing this same exercise with other NSAIDs, flea and heartworm products, commonly prescribed antibiotics, and other fast-moving drugs.
Tip: Start with the top 25 most frequently prescribed drugs in your pharmacy to see if there are FDA-approved generic alternatives available, and start applying margin pricing.
Stocking FDA-approved generic pharmaceuticals and utilizing targeted, well-thought-out margins can also better position your clinic to compete against online and human retail pharmacies. Millennials have surpassed Baby Boomers as the largest potential client demographic in veterinary medicine.2 Millennials are historically tech-savvy and may be more likely than other clients to pull out their phone to check your pricing against any online entity that sells that brand. From our increased exposure to human generic drugs in our daily lives, one could assume every generation is becoming more comfortable with asking for and seeking out generic alternatives to the higher-priced pioneer brands for their pets. So, if your clinic is not offering FDA-approved generic alternatives to your clients and not giving them an alternative option to the pioneer brands, you may initially get a sale but could lose the revenue stream as your clients price shop. This may be especially true for chronically used drugs that are prescribed for the life of the pet. Almost every veterinary professional I have met truly wants to save their clients money when they can—and some clients are having to make some tough choices regarding where to spend their discretionary income.
Tip: It makes good financial sense to charge clients lower margins on maintenance drugs and higher margins on drugs used for short-term treatments.
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